Freeport-McMoRan: a Terrific Buy

Freeport-McMoRan (FCX) is taking aggressive steps to reduce unit costs for copper. These steps include curtailing the high costs production, better equipment fleet management, adjusting mine plans and revising rig contracts. FCX expects these costs reduction moves to enable the company to reduce its unit costs by more than 25% to $1.10 lbs copper.

Freeport-McMoRan plans to produce copper from its low costs and high grades mines such as El Abra, Miami, Tyrone and Sierrita. In fact, the company has made adjustments that aggregate roughly 350 million pounds, about 9% of its 2015 sales by adjusting production at four of its mines.

These mines are capable of generating free cash flow, after sustaining capital expenditure at $2.00 lbs copper. In fact, the company is planning to make further adjustment upon requirement in order to remain cash flow positives.

Minimizing capital expenditure and reducing debt to support its cash flows

Freeport-McMoRan has significantly reduced its capital spending in the light of low commodity prices this year. It expects its total capital expenditure for 2016 to come in at $3.4 billion, which is approximately 46% below 2015 level. In fact, the company forecasted further reduction of 32% in capital spending in 2017. It is holding back expansion and development of projects as well as revising capital spends on its new projects. Meanwhile, FCX is spending money on those projects that are capable of generating profits at the current price set up.

In addition, Freeport-McMoRan is reducing its net debt to strengthen its balance sheet and improve its financial flexibility, while protecting its liquidity. For instance, Freeport-McMoRan is evaluating approximately $5 billion to $10 billion asset sales this year. This includes additional 20% interest sales of its Grasberg assets. Freeport-McMoRan plans to use the proceeds from these non-core assets sales to pay off its debt this year. In fact, it has recently entered into an active discussion with various parties to sell its non-core assets.

Freeport-McMoRan has total debt of $20 billion but it is spread well over the next few years. It has only $200 million of term loan maturing in 2016 and approximately $1.8 billion in 2017. Also, the company has an undrawn facility of $4.00 billion at the end of 2015 that further supports its liquidity position.

Conclusion

Freeport-McMoRan is doing right things by reducing its capital expenditure and net debt. Also, it has streamlined its assets to the current market environment, and focusing on those assets that can generate profit at the prevailing market prices. Moreover, the long-term copper fundamental such as demand and supply looks pretty stable that should strengthen copper prices going ahead.